Congress’s Assault on Charities

By Ray D. Madoff

Nov. 26, 2017

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A fund-raising gala for City Harvest, which delivers food to community food programs. Charities like City Harvest could be hurt under the Republican tax bills.CreditNina Westervelt for The New York Times

NEWTON, Mass. — The Tuesday after Thanksgiving, called “Giving Tuesday” to mark beginning of the season of charitable giving, reminds us of the important work charities do: feeding the hungry, sheltering the homeless, promoting justice, nurturing the spirit, curing diseases, providing education, promoting the arts and more. These organizations play an essential role in American society.

While legislators pay lip service to the importance of charities, in recent years they have failed to adopt policies to ensure that charities get what they need to do their work. Provisions in the tax bills the House and Senate are considering would make the situation worse.

For charities to function, they need an adequate flow of donations, the ability to use these donations for their mission and the ability to remain outside the political fray. These interests have been protected in the past by a tax deduction that encourages charitable giving, a rule that requires donors to give up control over donated funds in order to take advantage of the deduction, and prohibition of political activities by charitable organizations. Each of these is under significant threat.

The first threat has to do with the availability of the charitable deduction. Under current law, it is available only to taxpayers who itemize their deductions. Tax filers can choose to either itemize their deductions (in which case they add up their deductions for charitable giving, state and local taxes, mortgage expenses and other allowable deductions), or to take a “standard deduction” of $6,350. Taxpayers who claim the standard deduction — 70 percent of all taxpayers — get no additional tax benefits for their charitable giving.

Proposals in both the House and Senate tax bills would increase the standard deduction to dollar amounts so high that a vast majority of American taxpayers would no longer itemize and therefore would receive no tax benefits for their charitable giving. Charities are particularly concerned about this expansion of non-itemizers because it would include many larger donors who tend to be mindful of the tax consequences of their gifts. A recent report by the Lilly Family School of Philanthropy estimates that charities could lose as much as $13 billion in donations if the standard deduction is increased.

The second threat to charities has to do with control of charitable donations. The requirement that donors give up control over donations to get the deduction is intended to withhold tax benefits until a charity is given full use of the funds.

But in recent years, financial institutions have promoted an investment vehicle — the donor-advised fund — that follows the letter but violates the spirit of this rule. Contributions to such funds receive an immediate tax benefit because donors give up legal control over the donated money. However, the appeal of donor-advised funds is that donors, in practice, retain control over the eventual distribution (and until then, the investment) of their contributions. Donors claim an immediate tax deduction but can defer distribution of the money into the indefinite future, all the while making money for the financial institution managing the funds.

Donor-advised funds are popular among the wealthy, with Fidelity Charitable, the largest purveyor of such funds, receiving more “donations” than any other charity, while six of the top 10 fund-raising charities were donor-advised fund sponsors. More than $85 billion is parked in donor-advised funds, but there is no obligation for these funds to ever be made fully available for charitable use. Although proposals have been made to ensure the timely payout of money put in donor-advised funds, Congress has yet to act.

The third threat has to do with the ability of charities to remain outside the political fray. If charities were permitted to be involved in politics, they could be pressured by donors seeking to promote their political views in a tax-beneficial way. Since 1954 charities have been saved from this pressure by a rule known as the Johnson Amendment, which prohibits charities from engaging in political speech.

Charities have been unified in their support for retaining the Johnson Amendment, but still the House bill includes language limiting its application, and threatening to pollute the whole charitable sector by pulling it into the realm of politics.

Lawmakers can take three simple steps to save charities. First, they should ensure that all taxpayers be allowed to claim the charitable deduction, regardless of whether they claim the standard deduction. To minimize the impact on the federal budget, and to encourage greater giving, Congress should limit this benefit to charitable contributions in excess of 2 percent of the donor’s adjusted gross income.

Second, Congress should require that donor-advised fund accounts be distributed outright to charities within 10 years of contribution. Third, Congress should retain the law prohibiting political activities by charitable organizations.

It is the season of giving. Let’s give charities what they really want for the holidays: the ability to do their work to fulfill their missions and serve the American people.

Ray D. Madoff is a law professor at Boston College and the director of the Boston College Law School Forum on Philanthropy and the Public Good.